Venezuela stopped paying bondholders in September, according to central bank data, contradicting statements by President Nicolás Maduro that the country would continue to honour its debts while negotiating a resettlement with its creditors.

The data show that regular foreign debt payments of hundreds of millions of dollars a month, in line with the country’s sovereign obligations, fell to a few tens of millions from last October for fees and the legacy of a 1980s-era restructuring.

The data were posted in an Excel file as part of a recent revamp of the central bank’s website and include monthly expenditures in US dollars on public foreign debt payments going back to 1996. Previously, data on foreign debt payments were published in the form of a ratio that revealed little information, Mr Dallen said. “This must have been posted by an intern,” he added.

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Mr Maduro announced on November 2 that the country would restructure and refinance its debts after making one last payment on a bond owed by PDVSA, the state-owned oil company. S&P Global, the rating agency, declared the country in default shortly afterwards.

Yet holders of bonds issued by PDVSA and Elecar, a state-owned electric utility, have continued to receive sporadic payments, which have amounted to about $2.5bn since Mr Maduro’s announcement. Several payments have been made late, sometimes after the 30-day grace payment for coupon payments.

No payments at all have been received on bonds issued by the government of Venezuela, despite assurances that the process of payment was under way.

The central bank data, which cover payments of sovereign debt only and exclude obligations by PDVSA and other state entities, show that just $83m was paid in October, compared with sovereign obligations amounting to $465m, according to data from Caracas Capital.

Payments in November fell to $28m, compared with obligations of $183m, and in December declined to $23m, compared with obligations of $242m.

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Mr Dallen, who broke the news of the stalled payments to his clients on Monday, said October’s payment included about $74m due on a “Brady bond” that resulted from Latin America’s debt restructuring in the late 1980s. The payments in November and December attributed to foreign debt service would include lawyer’s fees and other costs, he said. Mr Dallen said no money had been received by any holders of Venezuelan sovereign bonds.

He said Venezuela had chosen carefully which PDVSA and Elecar bonds to continue paying. Payments included $984m owed by PDVSA on a bond due in 2020 that is secured by 51 per cent of the shares in Citgo, Venezuela’s US refining and distribution subsidiary. But he said evidence from clearing houses suggested these payments, too, had come to a halt.

“We don’t think they are paying PDVSA bonds either,” he said. “They have been doing it [defaulting] strategically to sow confusion. They have said they have begun the process of paying things they clearly did not pay, and blamed it all on sanctions.”

The US has imposed several rounds of sanctions on Venezuelan individuals and institutions. Adding to pressures last August, it also banned any involvement in new bonds or shares issued by the government or PDVSA. Last month it prohibited involvement in the country’s proposed digital currency, the petro, as well.

A spokesperson for Venezuela’s economic ministry was not immediately available for comment.

The ratio of outstanding government debt by the end of a year to that year's GDP is a key indicator of whether a government faces a debt-default risk. The debt ratio can reflect an economy's ability to repay its debts. Studies show China's overall debt is under control, as its debt ratio is within safety limits and sovereign balance sheet is quite sound－the total debt ratio of China's central and local governments was 38.8 percent at the end of 2016, far lower than the 60 percent red line set by the Maastricht Treaty signed by European Community members in 1992 to integrate Europe.

China's liability ratio, too, is lower than the ratios of major economies and some emerging market economies, and even lower than the members of the Organization for Economic Cooperation and Development.

China's debt ratio is 52.97 percentage points lower than the average of the OECD members－the central government's debt ratio is 62.68 percentage points lower than the OECD members', though the local governments' ratio is 9.71 percentage points higher than the OECD average.

Size of economy makes a big difference

Besides, whether a government faces a debt risk should be judged not only in terms of debt expansion, but also by the size of the economy, that is, whether it has enough resources at its disposal to pay down the debt in the face of a financial risk.

In-depth research into China's sovereign balance sheet in recent years shows the continued increase in leverage has led to rising debt since the global financial crisis in 2008, but correspondingly the country's sovereign assets have also expanded, yielding a high level of net value for the Chinese government. For example, in 2015, China's net asset value was 101.8 trillion yuan ($16.21 trillion), the country had sovereign assets totaling 241.4 trillion yuan, and a debt of 139.6 trillion yuan. So, given the low liquidity of State assets of administrative organs and limited transfer of land rights, China's sovereign net assets will remain positive even after deducting 16.2 trillion yuan from State assets and replacing 68.5 trillion yuan land assets with 3.1 trillion yuan worth of land-transferring fees.

Important guarantees for debt repayment

State assets, including operating assets and some natural resources, are important guarantees for debt repayment. Although China has sufficient sovereign assets to cover the liabilities, it may sometimes face difficulties in repaying some debts. It should be noted, however, that the State assets may be underestimated and the debt overestimated.

Since the State assets' value was measured using historical-cost accounting, the net value of the assets and the government's ability to repay could increase if it is measured in terms of market value or fair value. And debt could be overestimated, because by simply adding up certain liabilities and contingent liabilities, and using different probability methods for transferring contingent liabilities will lead to different outcomes. Also, except for losses in contingent liabilities, other non-performing debts such as subordinate loans and doubtful loans, in fact, can be partly repaid. Therefore, the real amount of sovereign net assets is likely to be much higher.

China's high net asset value structure is very different from those of major developed countries, because its resident sector, private enterprises and government departments (including State-owned enterprises) account for about one-third each of the total net assets while in developed economies, the resident sector accounts for 70-80 percent of net assets, with the public sector having a small share. Hence, with sufficient stock assets and other available resources, China's debt would be less risky.

Practical measures aimed at controlling debt risks

However, China's debt problem, especially the local governments' debt problem, deserves special attention, and the authorities should not ignore the root cause of what could be a systemic problem. To prevent any potential debt risk, the first thing to do is to deepen institutional reform to curb debt growth. There are four specific suggestions for achieving the desired results:

First, the authorities should further promote market-oriented bond issuance to check the rise of local governments' debt. Actually, the local governments' bond market has greatly improved in terms of marketization in recent years, although there is still room for improvement, especially in the bond issuance pricing mechanism. The low bond spread indicates the existing pricing mechanism doesn't reflect the true market value of some local government bonds and their cost of risk.

The authorities therefore should establish a market-oriented pricing mechanism with less administrative intervention－this is also important to increase the marketization of local debts and realize differential pricing regionally.

Second, a sound credit rating system should be established for the issuance of local bonds, while promoting information disclosure and market supervision on local loans can increase the local governments' financial transparency and make them more self-disciplined.

Third, a capital budget system should be established immediately to tighten regulations especially on State financing. And to minimize the debt risk from the very beginning and make fund allocation more efficient, it is necessary to work out a mid-term financing plan for major infrastructure construction projects, extending it later to cover all infrastructure projects. This plan should cover all sources of funding from all levels of government, such as financial subsidies, equities and debt financing.

And fourth, a regulation is required to impose severe penalties on the local governments that fail to reduce debt. There is also a need to set up a financial bankruptcy system for the local governments to curb debt.

Contingency plan to control local governments' debt

Local authorities are responsible for repaying their respective local governments' debts, and the central government is not obligated to bail them out, says the contingency plan to deal with the local governments' debt released on Nov 14, 2016. The plan also says the ability to control the debt risk should be incorporated in the performance and promotion of local government officials. Holding the local municipal and county administrations responsible for debt restructuring, based on the cause and time period of their debt risks, will be a serious warning to those local governments that have run up huge debts.

After the provincial governments start shouldering more responsibilities for municipal and county administrations in terms of financial management, the central government should distance itself from the local governments on debt repayment so that the latter can independently establish their credit rating system and curb opportunism.

The central government should also further diversify bond investors－for example, stock exchanges and commercial banks can issue some enterprise-and individual-oriented bonds, or explore better ways to issue bonds for institutional investors with social insurance funds, housing provident fund or supplementary pension. The reform can also help solve the problem of almost all investors flocking to commercial banks, by promoting financial liquidity in the secondary market and attracting locals to supervise government finances.

Beijing continued to lend to Venezuela last year, but not as much, reducing exposure to one of the world’s worst-performing economies.

Chinese policy banks extended $2.2 billion in credit, compared with $5 billion in 2015 and $4 billion in 2014, according to “Chinese Finance to Latin America and the Caribbean in 2016,” a report this week from the Inter-American Dialogue and Boston University. It draws on data from government, bank and media reports and interviews with officials, the authors said.

While Brazil accounted for 72% of the $21.2 billion in lending to the region by China Development Bank Corp. and Export-Import Bank of China, according to the report, Venezuela remained in the top three along with Ecuador. Together they accounted for 92% of of the total.

Among the factors reducing Beijing’s appetite for lending to Caracas were consumer inflation—720% last year and heading for 2,200% this year, the International Monetary Fund estimates—security and political instability, say analysts.

“China is primarily concerned that the Venezuelan opposition, were it to assume control of the government, would be unfriendly to China,” said Margaret Myers, co-author of the report and a director with the Washington-based Inter-American Dialogue.

While China is committed to maintaining a presence in Venezuela, the $2.2 billion credit line extended to Caracas last year can “hardly be considered a lifeline” for Venezuela President Nicolás Maduro, she added. Beijing has opted to stand by its strategic partner, however—in part, analysts said, because it sees that as the best hope for getting Caracas to repay the $62 billion it owes, presumably when oil prices recover.

“The Chinese government and also the policy banks have lots of concerns, but China also sees longer-term opportunity in Venezuela because it has lots of oil and minerals,” said Renmin University of China professor Cui Shoujun.

This week in Caracas, the two countries signed 22 deals worth $2.7 billion, according to official Chinese reports. One is for construction of a refinery in the Chinese city of Jienyang that can process 400,000 barrels of Venezuelan extra-heavy crude—although the project has been announced and delayed repeatedly since 2009.

The IMF expects Venezuela’s economy, beset by low oil prices and balance-of-payment pressures, to contract by 10% in 2016 and 4.5% in 2017. Yangjiang Topwin Factory, based in the southern Chinese city of Yangjiang, said exports of its stainless steel knives to Venezuela remain weak.

“The economic situation is not good there,” said Ru Yongquan, the company’s general manager. “I’m not very optimistic.”

Venezuela is part of China’s stronger economic and strategic focus on Latin America. In November, Beijing released a strategic blueprint for the region, its first in eight years.

Last year’s $21.2 billion—mostly for infrastructure and raw-material projects—was more than either the Inter-American Development Bank or the World Bank lent to Latin America and the Caribbean, the report said. It compares with $24.6 billion in 2015 and $10 billion in 2014. Chinese banks don’t impose policy conditions on borrowers, although financing often is contingent on the use of Chinese construction firms and equipment, the report added.

China’s decision to concentrate its financial firepower on Brazil, Ecuador and Venezuela reflects in part these countries’ rich natural resources and their willingness to negotiate the government-to-government deals that Beijing prefers, the report said. Perceived economic mismanagement limits their access to international credit markets, making their governments more receptive to Beijing, analysts said. The vast majority of Brazil’s $15.2 billion slice of last year’s lending, the report said, went to national oil company Petrobras Brasileiro SA, immersed in a corruption scandal.

The three countries “are in need of Chinese loans and tend to embrace China with relatively open arms,” Ms. Myers said.

While policy banks once dominated China’s lending to Latin America, commercial banks are increasingly active, the report said. Last year, for example, the Industrial and Commercial Bank of China Ltd. provided nearly $1 billion to Ecuador for state-led projects.

How Venezuela Became China’s Money Pit
Beijing is reportedly throwing good money after bad to the Latin American producer, but it has its reasons

Spoiler:

The world oil market is notoriously quick to react to headlines, but a seemingly significant one last week from the owner of the world’s largest reserves didn’t cause so much as a blip.

According to reports, all from Venezuelan authorities, the China Development Bank earlier this month pledged either $250 million or $5 billion “in favor of the increasing and strengthening of the country’s oil production.”

That Venezuela’s major industry needs “increasing and strengthening” is beyond question. Oil output crashed below a three-decade low to 1.34 million barrels a day last month. That is a million less than just three years ago and 2 million below the level when Hugo Chávez took power in 1999.

Chávismo clearly has been very bad for Venezuela’s oil production. Until recently it was very good for China, however, and its twin goals of expanding its influence and satisfying its need for oil. A report from the Center for Strategic and International Studies stated earlier this year that “China’s influence in Latin America is neither transparent nor market-oriented.”

But China clearly miscalculated in Venezuela, where it is now throwing good money after bad. The CSIS tallies $55 billion in energy-related loans alone that it has extended. Unable to come up with hard currency to service them, Venezuela has been paying in discounted barrels of oil but struggled even to do that after prices collapsed in 2014. China offered a “grace period” on some loans.

At one point when prices were higher and its oil industry less decrepit, Venezuela was sending China 600,000 barrels a day, according to Russ Dallen, the chief executive of Caracas Capital Markets, who has done extensive work untangling Venezuela’s opaque finances. He estimated that has brought the balance down to about $20 to $23 billion, plus another $3 billion to $4 billion owed to Russian oil company Rosneft.

The cash drain from these enormous debts may have exacerbated the decline in output, and there is scant chance that China’s latest infusion will do much to arrest the fall. Hence the market’s shrug at the news. But why does cash keep flowing in?

Part of it is the potential equity value of that bad debt. Chinese and Russian companies have been given valuable hydrocarbon concessions—in some cases including properties expropriated from Western firms such as Exxon Mobil. While past loans are a disaster, China and Russia now have investments to protect. Disbursing more modest, targeted sums makes sense.

Venezuela needs that cash. Right now it only can sell about 500,000 barrels a day for hard currency.

For those interested in the short-term impact on the oil market, new loans should be viewed as a way to protect the status quo. They make an outright collapse in output through internal unrest less likely, but they probably won’t arrest the decline either.

The legal cost of default: How creditor lawsuits are reshaping sovereign debt markets

ulian Schumacher, Christoph Trebesch, Henrik Enderlein 16 July 2018

For centuries, sovereign debt was assumed to be ‘above the law’ and non-enforceable. This column shows that this is no longer the case. Building on a new dataset on sovereign debt lawsuits, it documents the erosion of sovereign immunity since the 1970s and argues that legal disputes can disrupt government access to international capital markets, as foreign courts impose a financial embargo on defaulting sovereigns. These legal developments have strengthened the hands of creditors and raised the cost of default for debtors, with far-reaching consequences for government willingness to pay and the resolution of debt crises.

Spoiler:

For much of history, sovereign debt was assumed to be ‘above the law’ and non-enforceable (e.g. Eaton and Gersovitz 1981, Grossman and van Huyck 1988). Defaulting governments were protected by the principle of sovereign immunity and there is no supranational legal authority to enforce repayment (Panizza et al. 2009). As a result, creditors had few options but to accept a sovereign default if it happened, and to hope for the best.

The Argentine debt crisis of 2001 and its aftermath, however, illustrates a major shift in the legal framework of international sovereign debt markets. Following the default, dozens of hedge funds filed suit against Argentina in New York and litigated for full repayment. Fifteen years later, these holdout creditors prevailed and a favourable court ruling forced the government into a settlement of more than $10 billion – a multiple of the debt’s face value (Cruces and Levy Yeyati 2016, Hébert and Schreger 2017).

As we show in this column and related research, the case of Argentina is not an exception but part of a general trend (Schumacher et al. 2015, 2018). Since at least the 1970s, sovereign immunity has eroded and banks and specialised hedge funds have been increasingly successful in suing defaulting countries in courts in the US and the UK. Legal risks in this market have increased – with significant economic consequences for distressed sovereigns. Most importantly, we find that litigation disrupts government access to international capital markets.

Our research relates to an ongoing policy debate on the international financial architecture and on euro area reform. Holdout and litigation risks are widely discussed, but evidence and hard data remains scarce. For example, several official actors recognise that creditor litigation can be a serious obstacle to resolving sovereign debt crises and for the functioning of international payment systems (e.g. US Government 2012, IMF 2013, United Nations 2014). For Europe, Buchheit et al. (2013) and Bénassy-Quéré et al. (2018) have proposed a sovereign debt restructuring framework, partly to deter holdouts and protracted legal battles. At the same time, private investors such as Elliott (Financial Times2013) or the rating agency Moody’s (2013) claim that the holdout problem is overdone and that litigation remains an exception. We inform this discussion by providing stylised facts on creditor litigation and its externalities across four decades.

The rise of creditor litigation and asset attachments – not just Argentina
Our research clearly shows that the holdout problem and litigation risks are not being exaggerated and should become part of our understanding of international capital markets.

The analysis builds on a comprehensive new dataset. We coded all events of sovereign debt litigation filed in the US and the UK between 1976 and 2010. The data show that since the mid-2000s, one in two defaults was accompanied by litigation, compared to less than 10% in the 1980s and early 1990s (see Figure 1). The claims under dispute have grown from close to nil to an average of 3% of restructured debt. Our case archive, based on direct coding from court documents, identifies 158 litigation cases against 34 defaulting sovereigns filed in the US or UK between 1976 and 2010. This is a lower bound since we focus on lawsuits by institutional investors and avoid double counting.

Figure 1 The rise of sovereign debt litigation: restructurings with and without litigation

Note: This figure shows the number of sovereign debt restructurings implemented in each year (left axis, light bars) and the subset of these restructurings that involved at least one creditor lawsuit in a US or UK court (dark bars). The black line shows the ratio of debt restructurings affected by litigation (in % of all restructurings, as five-year moving average, right axis).

Our case archive also shows that the market changed fundamentally in the early 1990s. A new type of plaintiff emerged: specialised distressed debt funds, which often buy debt at a discount and then sue for full repayment. Hedge funds now account for two-thirds of all new cases. The lawsuits they file are typically larger, less likely to be settled early on, and involve multiple attempts to attach sovereign assets abroad or interrupt the government’s capital market access.

Figure 2 Sovereign debt lawsuits with attachment attempts

Note: This figure shows pending sovereign debt lawsuits that involved enforcement proceedings by year, between 1975 and 2010, either as number of cases (bars, left axis) or as a share of all pending cases (line, right axis, as five-year moving average). Enforcement proceedings include both pre- and post-judgments actions. In recent years, more than 50% of creditors made at least one attempt to seize sovereign assets abroad.

Litigious creditors rarely wait for the satisfaction of their claims in court. Instead, they attempt to pressure the defaulting government into an out-of-court settlement at profitable terms. Since the 1980s, the most successful approach to achieve such settlements have been threats to disrupt international capital flows, meaning legal proceedings that enable creditors to interject cross-border financial transactions. Figure 2 shows that the share of lawsuits involving enforcement proceedings has increased from close to zero in the 1980s to 30-50% in the 2000s.

Litigation can block access to international capital markets
Creditor litigation needs to be taken seriously if it has economic consequences. Guided by the theoretical literature, our analysis focuses on the impact on international borrowing. We therefore combine our litigation dataset with micro-level data on sovereign external bond and loan placements since the 1980s. Our main finding is that legal disputes are a strong predictor of market exclusion, over and above the default effect per se. During years with attachment attempts by creditors, sovereign external issuance drops close to zero. Between 2000 and 2010, there is not a single instance in which a government facing a creditor lawsuit in the UK or US also placed a sovereign bond in these jurisdictions.

For illustration, consider Figure 3, which focuses on the case of Argentina. The country was among the most active emerging market issuers during the 1990s. After the default of 2001, however, the government did not place a single sovereign bond in international markets for 14 years. The private sector, in contrast, re-accessed foreign bond markets on a regular basis starting in late 2003, when economic conditions improved. The evidence suggests that sovereign litigation impairs sovereign market access, but not that of corporations.

Case studies provide further support for the channel at work: litigious hedge funds managed to block cross-border debt flows via legal means not only in Argentina but also in many other cases, such as in Costa Rica, Panama or Peru in the 1990s and 2000s, where debt issuances were delayed or cancelled due to creditor legal action.

Figure 3 Foreign borrowing in Argentina: Sovereign vs corporate bonds

Note: This figure shows the volume of bonds placed by the Argentine government (dark bars) and private Argentine companies (light grey bars) between 1997 and 2010 by quarter. Both the government and private firms were active borrowers in the 1990s. After the 2001 default, only the private sector returned to issuing bonds internationally. The loss of market access by the Argentine government coincides with 50 lawsuits filed by commercial investors over the past decade.

Holdout risks since 2010: A summary
Since Argentina’s default, the relevance of legal risks has only continued to increase. Governments in distress now frequently point to holdouts risks and litigation when explaining their policy choices, and the same is true for rating agencies justifying up- or downgrades. In line with this, our case studies confirm that holdouts and legal threats played a prominent role in many recent sovereign debt crises:

Greece faced legal threats regarding its foreign-law bonds in 2012 and decided to repay the holdouts in these bonds in full, allowing them to escape the haircut imposed on all other creditors (the resulting transfers amounted to more than 2% of Greek GDP; Zettelmeyer et al. 2013).
The Republic of Congo defaulted in August 2017, when a creditor convinced a New York court to freeze a bond coupon payment.
Puerto Rico, a non-sovereign US territory, was confronted with large-scale creditor litigation in its ongoing debt crisis but was shielded from such legal action via the 2016 PROMESA legislation enacted by the US Congress. The law was intentionally designed “to remove the damaging uncertainty of protracted litigation that threatens to further destabilize the economy", according to former US Finance Minister Jacob Lew (2016).
Ukraine is currently being sued by Russia over a defaulted bond in a London court. In 2015, Russia threatened to legally force all of Ukraine's international bonds into default.
Venezuela has been in a humanitarian crisis for years and defaulted on most of its external and internal creditors. International bondholders, however, continued to be serviced fully until September 2017. Many observers see legal risks as the main reason why Venezuela treated its foreign bondholders so favourably (e.g. Economist 2017). In particular, the government feared that creditor lawsuits and attachment attempts might endanger oil exports – the country's main source of income.
Looking ahead: Legal risks are here to stay
We conclude that sovereign debt litigation is reshaping international sovereign debt markets in a fundamental way. Courts in foreign jurisdictions increasingly act as a third-party enforcement mechanism as they can explicitly or implicitly impose a financial embargo on defaulting sovereigns. The consequences are already starting to show, as legal risks have influenced the resolution of recent debt crises and governments' willingness to pay, in Argentina, Greece, Venezuela, and beyond.

Looking ahead, there are few reasons to assume that the legal risk on sovereign debt will decrease soon. Recent hedge fund successes in Argentina and Greece have drawn attention to the distressed sovereign debt market. Moreover, the most widely discussed policy reforms – such as newly designed collective action clauses (CACs) – are unlikely to fully prevent holdout litigation in future debt crises. It may take more than a decade until newly added clauses will disseminate throughout the debt stock. Moreover, even with CACs, at least such as those introduced in euro area sovereign bonds after 2013, it will remain possible to buy blocking stakes in individual series in order to hold out and file suit.

Authors’ note: This column should not be reported as representing the views of the ECB. The views expressed are those of the authors and do not necessarily reflect those of the ECB.

JOHANNESBURG, July 30 (Reuters) - The International Monetary Fund on Monday kept South Africa’s economic growth forecast for 2018 unchanged at 1.5 percent but warned that the economy faced several headwinds, mainly the rapid rise in public debt and potential bailouts to state firms.

Cyril Ramaphosa’s election as President in February on a promise to implement reforms and root-out corruption has buoyed investor confidence, although the growth outlook remains much lower than the 5 percent annual growth government is aiming for to make a dent in near-record unemployment.

South Africa’s debt is set to soar to more than 50 percent by 2020 as state firms, including power utility Eskom and South African Airways, burn through government guarantees.

Growth has been stagnant over the past 5 years, pushing the country’s credit rating to the brink of subinvestment.

“The IMF’s concerns on fiscal policy relates to the rapid increase in public debt as a share of GDP, which has doubled over the last decade, depleting fiscal buffers and constraining fiscal policy space,” National Treasury said in a statement quoting the IMF’s article IV statement

Turkish firms and government face $3.8 billion bond crunch in October: Societe General

Spoiler:

LONDON (Reuters) - Turkey and its firms face repayments of nearly $3.8 billion on foreign currency bonds in October as the country struggles with a plunging lira that has lost more than a third of its value since the start of the year.

FILE PHOTO: Turkish President Tayyip Erdogan, accompanied by Energy Minister Berat Albayrak, attends a funeral ceremony for police officer Hasim Usta who was killed in Saturday's blasts, in Istanbul, Turkey, December 12, 2016. REUTERS/Osman Orsal/File Photo
Emerging market (EM) investors have been worried about Turkey’s external debt burden and the ability of its firms and banks to repay after a boom in hard currency issuance to help finance a rapidly growing economy.

For companies, the cost of servicing foreign debt has risen by a quarter in lira terms in the past two months alone.

“Turkey’s external financing requirements are large,” Jason Daw at Societe General wrote in a note to clients. “It has the highest FX-denominated debt in EM and short-term external debt of $180 billion and total external debt of $460 billion.”

Calculations by Societe General show that Turkish firms will face $1.8 billion of hard-currency denominated bonds maturing by the year-end while $1.25 billion of government bonds will come due. Additionally, a total of $2.3 billion in interest must be paid.

The heaviest month for repayments is October, when $3 billion in principal and $762 million interest are due.

“Principal and interest payments should be closely watched to year end – it is 25 percent more costly for the corporate sector to repay their obligations compared to June given FX depreciation,” Daw wrote.

One mitigating factor may be that much of the short-term external debt was in instruments such as bank loans and trade credits, which could be smoother to restructure or roll over than attempting to do so on bond markets, Daw added.

Data from LPC showed that about $7 billion of loans are due to mature until the end of the year, with more than 90 percent of those being bank loans.

A number of lenders such as Akbank (AKBNK.IS), Turk Ekonomi Bankasi and Turk Eximbank are in the market attempting to refinance loans. However, international banks are unlikely to make any decisions before ratings agencies react, with many predicting the lending boom would grind to a sudden halt.

“Western European banks from Spain and France are particularly exposed, with over half of the debt owed to them.”

Shares in some of Europe’s major banks have been hammered over the last week as markets fret over their exposure to Turkey.

Odenius also points to the fallout from Turkey’s financial system and the corporate sector being effectively short dollars, calculating that net foreign exchange liabilities (NFL) of the central bank and commercial banks combined amounted to $27 billion at the end of June.

Akbank TAS
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“While that is undoubtedly a manageable figure, these liabilities only pertain to foreign lenders,” Odenius wrote in a note to clients. “Including the $147 billion in dollar deposits by resident households and firms, the ‘adjusted’ NFL spirals up to nearly $175 billion — an undoubtedly less manageable figure.”

With President Tayyip Erdogan’s administration shunning orthodox monetary policy and highly reluctant to raise interest rates to contain inflation at over 15 percent, markets are also closely watching how the Turkish state goes about refinancing its debts.

Erdogan’s government has adamantly rejected speculation that it may have to seek support from the International Monetary Fund (IMF). Qatar has pledged about $15 billion but details have been scant.

“Rather than sticking with the approach taken by numerous other countries – including Argentina earlier this year – by raising interest rates and seeking some form of IMF support, Turkey has shunned both in a very public manner,” wrote Mohamed El-Erian, chief economic adviser at Allianz.

“Unless it changes course, the government risks much wider damage – and not just in Turkey.”

A growing drumbeat on Capitol Hill for further sanctions against Russia because of its interference in U.S. elections has hit Russian bond markets and the foreigners who trade in them.

Since U.S. legislators ramped up efforts at the start of August to pass laws that would penalize Russian financial and energy industries, prices of bonds denominated in Russian rubles have dropped about 7%, according to IHS Markit.

Prices are likely to fall further as Congress moves forward legislation that would prohibit U.S. investors from buying newly issued Russian government bonds, emerging-market bond fund managers said. Such selloffs also hit Russian banks and institutional investors, which are heavy buyers of their government's debt.

The decline is an unusual example of U.S. policy affecting securities of foreign governments, putting Russia in the realm of countries like Venezuela and Iran. It has also rocked emerging-markets investors already reeling from heavy losses in Argentina and Turkey.

Rising interest rates and the strengthening U.S. dollar have sparked stock and bond routs in 2018 in emerging-market countries such as Argentina and Turkey with trade imbalances and fiscal deficits. The selling spread in recent weeks to stronger economies like Indonesia. Losses in the year to date on a widely traded emerging-markets bonds exchange-traded fund are now about 6.28%, according to data from Morningstar.

Russia had stood out as one of the more stable economies in the developing world this year, bolstered by its low debt -- 17.4% of gross domestic product, according to S&P Global Ratings -- and prudent fiscal policies. Political risk has increasingly overshadowed that economic strength as the U.S. government moves to pinch Russia's finances.

"Investors have had years to reduce exposures in Russia," Daleep Singh, a former U.S. Treasury Department official, said at a hearing before the Senate Banking Committee Wednesday about one of the new sanctions bills. "I can think of no credible argument why U.S. public pension funds and saving vehicles should indirectly fund the Russian government while the latter continues to sponsor violations of U.S. sovereignty."

The proposed laws wouldn't prevent U.S. firms from owning any of Russia's existing debt but many are selling out all the same, preferring to avoid the political noise engulfing the bonds and potential compliance work involved in owning them, the fund managers said.

"People are just saying 'I want to stay out of it for a while,'" said Kumaran Damodaran, a fund manager at Stone Harbor Investment Partners. Stone Harbor's local-currency emerging-markets bond fund is still about 8% invested in Russian bonds because they pay high yields and the country has plenty of money to pay its debts even if the sanctions get imposed, he said.

Congress accelerated work in July on at least two bills involving sanctions on Russian debt, when President Trump appeared to support Russian President Vladimir Putin's denial of election interference. The Trump administration imposed milder sanctions in April affecting bonds of companies owned by Russian oligarchs and was working Wednesday on further measures.

"It's up to us in this Congress to write strong, strong sanctions language," said Sen. Sherrod Brown (D., Ohio) in Wednesday's Banking Committee hearing.

In addition to blocking U.S. investors from buying new Russian bonds, Congress is considering freezing assets of certain Russian banks and state-owned entities, but has stopped short of a full-scale financial quarantine like those imposed on Iran and North Korea. Such a blockade remains unlikely unless Russia escalates either its disruption of U.S. elections or military operations like its incursion in eastern Ukraine.

It is unclear how much the measures currently under consideration will actually affect Russia's finances, which have been strengthened by a recovery in the price of oil, the country's largest export. The cost of credit-default swaps protecting holders of Russian bonds from nonpayment by the government -- a key measure of the perceived risk in the country's debt markets -- has declined about 63% since 2015, when collapsing oil prices threatened Russia's economy.

Nevertheless, passage of additional sanctions in Congress will likely spark a new round of selling by U.S. bondholders, the fund managers said. Even existing Russian bonds that wouldn't be affected by the potential sanctions would require portfolio managers to explain to nervous compliance executives and clients why they hold the debt, they said.

MOSCOW—Russia’s central bank raised interest rates Friday, moving to defend the ruble against market volatility and inflation as global investors question the outlook for emerging-market economies and the possibility of fresh U.S. sanctions.

The Bank of Russia raised its key interest rate to 7.5% from 7.25%, ending a series of cuts that brought it down from a peak of 17% at the end of 2014 that was introduced in the wake of earlier sanctions imposed on the country by the U.S. and Europe.

The raise, which surprised most economists, eased investor concerns over the bank’s freedom of action in maintaining Russia’s macroeconomic stability. In recent weeks, President Vladimir Putin’s prime minister and chief economic adviser both suggested lending rates should fall to boost growth.

The bank’s move ended weeks of speculation over the course of Russia’s monetary policy, underscoring Elvira Nabiullina’s willingness to take prompt action when confronted with threats to economic stability, even when that meant going against the wishes of Mr. Putin’s economic team.

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After the financial crisis, investors sought higher returns in risky emerging markets. Today, the money is flowing back to the U.S. What went wrong for countries such as Argentina and Turkey, and could it get worse? Image: Crystal Tai
“Our goal is to meet the inflation target, this is the essence of our independence,” central bank chief Ms. Nabiullina told reporters in Moscow after the rate decision. “There’s a growing uncertainty over sanctions against Russia, the growing geopolitical risks have increased the outflow of capital from emerging markets.”

She said she would consider further hikes this year if the inflationary pressures caused by rising sales tax and currency depreciation don’t subside. The central bank now expects inflation to increase to as high as 5.5% by the end of next year, above its 4% target.

To help stabilize the ruble, the central bank will stop buying foreign currency this year, Ms. Nabiullina said. The ruble is down more than 14% against the dollar so far this year, although it rose 0.7% following the rate decision Friday.

The markets reacted positively to what they saw as the assertion of Ms. Nabiullina’s independence. The country’s benchmark 2-year bonds due in 2020 rose slightly following the rate decision. Moscow’s main stock index rose 1% Friday.

“With this decision Nabiullina is showing she’s prepared to make decisive decisions to react to tactical challenges that are arising in the markets,” said Oleg Kouzmin, chief Russia economist at investment bank Renaissance Capital. “Her mandate is strong and she continues to enjoy the market’s trust.”

Mr. Kourmin said he expects the key rate to rise to 8% in the coming months until emerging market volatility subsides.

Her assertive pursuit of stability has earned her the praise of the International Monetary Fund and big investment funds, and made it possible for her to have a bigger impact on the economy with less action than many of her developing country counterparts.

In Turkey, by contrast, the central bank’s belated decision on Thursday to raise its key rate in response to a plummeting currency was quickly questioned by President Recep Tayyip Erdogan, weakening its impact. Similar moves to raise interest rates have recently occurred in Argentina, Indonesia and other developing economies.

“We consider that this would create a more positive attitude to emerging markets, to which Russia belongs,” Ms. Nabiullina said, referring to Turkey’s hike.

While policy makers face a variety of domestic problems in those countries, a common factor driving their recent moves is a series of rate increases by the Federal Reserve, which has led to an flow of capital into the U.S. and away from developing economies.

As a result, many central banks in the developing world face an unpleasant choice on whether to raise their interest rates as the dollar strengthens and investors sour on emerging markets. Raising rates can help limit capital outflows but could crimp economic growth. Leaving rates unchanged could make currencies more prone to further declines, creating the risk of higher inflation.

Russia faces a particular threat of capital outflows at a time of heightened tensions with the West.

“It…looks like the bank’s board made the move today to stem capital outflows resulting from fears about new U.S. sanctions,” wrote William Jackson, an analyst at Capital Economics, in a note to clients.